One question that is often on my mind is: how much should I keep in my emergency fund? Or, do I even need an emergency fund?

I’ve had this discussion with a few friends, acquaintances, and coworkers, and if you do have an emergency fund, how much do you need, and where should you invest those funds?

Before we dive into the emergency fund debate, take a few minutes to watch this highly informative video on emergency funds:

The Benefits of an Emergency Fund – Financial Emergency Examples

At the end of the day, things happen in life. You don’t want to find yourself in a desperate situation with no emergency cash-on-hand. That could include:

• You lose your job
• You quit your job
• Someone in your family needs emergency medical care
• Your family pet (dog, cat, horse) needs an emergency medical procedure
• A relative passes away, and you need to pay for funeral expenses
• Your home furnace is shot and needs to be replaced
• A wind storm takes the shingles off your roof, and you need a new roof (and your insurance company won’t cover the roof replacement)
• The dreaded root canal surgery

I’m not going to detail all of the things that could happen in life, but, things do happen, and when emergencies happen, the last thing you want to worry about is how you’re going to cover yourself and your family during the unfortunate event. After all, dealing with these situations is stressful enough, that the last thing you want to worry about is your personal finances.

So, the question is, how much money should you have in your emergency fund, and where should you keep your emergency fund money?

How Much Money Should You Have in Your Emergency Fund?

A common argument most folks, like Dave Ramsey, suggest that you start with $1,000. I suggest you start at $10 and then grow the account monthly from there.  At least get started.

Mark Cuban says you should keep at least 6 months of expenses, ”If you don’t like your job at some point or you get fired or you have to move or something goes wrong, you’re going to need at least six months’ income.”

Suze Orman, former CNBC host, and a financial expert says you should keep closer to one year of expenses. She believes three to six months isn’t enough.

I keep a little over 6 months of expenses in an online savings account. We use Ally Bank, and year-to-date, we’ve made over $300 just in interest accumulation.

I wasn’t always a fan of keeping so much in savings. However, my husband instilled in me a good trait for saving into an emergency fund when we met. I think we’ve always had at least $10,000 in cash since we moved in together seven years ago to combat anything life throws our way.

Just Get Started – Open an Emergency Fund Bucket

The hardest part of doing anything new, or, of establishing a new routine, is taking the first step.

Here’s my suggestion:

• Open a new savings account at your bank 
• Add a few dollars into the account as soon as you can
• Moving forward, contribute $50 to $100 a month into the account for the next couple of years. Before you know it, in three years, you’ll have $2,000 to $4,000 saved, and now you have your emergency funds set aside.

What Shouldn’t Be Considered an Emergency Fund Expense?

Keep in mind, your emergency funds aren’t to be used for:

• Emergency family vacation to Mexico to escape the winter weather
• Baseball game – your favorite team has made it to the world series
• Purchase a new upgraded car
• Cosmetic surgery

Where Should You Keep Your Emergency Fund Money?

I’ve read quite a few different strategies on where to keep your money for emergency funds. I don’t agree with some of them, but again, this is a choice that is up to you. So, the question is, should I invest my emergency fund. and where can you keep your fund?

1. Keep it in cash under your bed

This option is easy and straightforward. It is also not very wise.

I’ve heard so many people argue that their money is safer under the mattress because the stock market is so volatile. Yes, the market is volatile. It is extremely volatile if you attempt to time it. You need to stick in the market for the long-haul. So when something tragic like what happened in January of 2009 happens, you stay in it.

Why?

Well, in January 2009, the S&P 500 hit a low of 735. The S&P is now over 3,000 from its 2009 lows, so, if you run some quick math on what $10,000 invested in January 2009 would look like today, you would be looking at over $40,000, plus, if you invested an additional $5,000 each year on top of that, you would have over $140,000. 

2. Stock cash away with your current bank

How exciting does a whopping 0.1% return sound? Maybe more like 0.01%

The quick math… If you have $10,000 in a savings account, after one year you will have made $10 with a 0.1% interest rate. That is right, $10 dollars.

If you keep cash in one of the big banks like I used to you it is basically like storing the money under your bed. You do get FDIC insurance, so your money is much safer than under your bed., but you are actually losing money because you are not keeping up with inflation.

3. Keep your money in an online bank like Ally

Online banks, like Ally Bank, is where I keep our emergency fund. I like Ally Bank over traditional big banks for a few reasons:

• Better rate of return – 1% – compared to 0.1% (check out my old savings account interest rate)
• Quick access to cash – it is easy to transfer money to and from Ally to my normal bank to access my cash. You can also get an ATM card from Ally to access cash immediately.
• You still get FDIC Insurance up to $250,000 so your money is safe
• Ally gives you the ability to open multiple savings accounts for free. And it is easy. Therefore, you can keep separate accounts like a vacation account, savings for large, off-cycle bills like car insurance, and your emergency fund!
• Fund your Roth IRA because you can withdraw contributions at any time tax and penalty-free
• You can invest your emergency funds, possibly even use your Roth IRA. 

I really like this concept, but I am late to the game-saving into a Roth IRA. I do not have enough money in my Roth to cover 6 months of living expenses.

4. Money Market Account for Emergency Fund

If you worry about whether your emergency fund will be there, and intact when you need it most, an emergency fund should be deposited in a money market fund.  Yes, the fund will pay a paltry 1 to 2% interest, but, for many, it’s better to know that those funds are there and ready to go when you need it most. The last thing you need is to hear from your dentist that you have to get into the chair tomorrow, and you can’t afford the emergency dental surgery.

5. Why not invest the money instead?

As much as I like the idea of using the Roth IRA as an emergency fund, I still think I’ll stay with keeping cash in Ally. For me, investing in my Roth, 401(k), and taxable is about accumulating wealth. My emergency fund isn’t an investment but a safety net.

Conclusion

If something were to happen to me or my family, we have the cash in our emergency fund on hand and ready to use. My investments are about building long-term wealth so we have freedom later in life to have more flexibility. So I would prefer not to tap into them when a rainy day comes, plus, there’s nothing worse than having to cash our your stock investments when the market is down 5% to cover an emergency tooth repair

Good luck with your wealth-creating journey.

If you liked this post, at the opposite end of the spectrum, you might enjoy this post on how to become a decamillionaire:  How to Become a Decamillionaire, Grow your Net Worth to $10 Million, and Join the 1% Club

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Also, I published a book during the summer of 2018, “The Kickass Entrepreneur’s Guide to Investing, Three Simple Steps to Create Massive Wealth with Your Business’s Profits.” It was number 1 on Amazon in both the business and non-fiction sections. You can get a free copy here.